Mitsubishi UFJ Reports Profits

Mitsubishi UFJ Financial Group Inc. ( MTU - Analyst Report ) reported net income of ¥815.8 billion (US$10.4 billion) for nine months ended December 31, 2011 versus net income of ¥551.8 billion (US$6.3 billion) in the year-ago comparable period. Diluted net income per common stock was ¥56.92 (72 cents) versus ¥38.30 (44 cents) in the prior-year period.

Results reflected decrease in G&A expenses and a significant decline in consolidated credit costs driven by drop in credit costs from other subsidiaries. Moreover, loans and deposits growth were the positives for the period. Yet, fall in gross profits and net interest income was on the downside.

Gross profits for the period were ¥2,646.6 billion (US$33.6 billion), down ¥85.8 billion (US$1.1 billion), or 3.1% from ¥2,732.5 billion (US$31.4 billion) reported in the period ending December 31, 2010. Gross profits declined primarily due to lower consumer-finance income and dividend on preferred stock, partially offset by an increase in net gains on sales of debt securities.

Moreover, the period reflected ¥41.9 billion (US$0.53 billion) increase in trading income and other business profits while ¥118.4 billion (US$1.5 billion) decrease in net interest income. For Mitsubishi UFJ, net fees and commissions were ¥698.9 billion (US$8.9 billion) compared with ¥705.4 billion (US$8.1 billion) as of December 31, 2010.

The balance of securitized products and related investments at the end of December 2011 increased to ¥1.52 trillion (US$0.02 trillion) in total, an increase of ¥0.06 trillion (US$0.76 billion) compared with the balance of ¥1.46 trillion (US$0.02 trillion) as of March 2011. The increase was mainly due to a rise in highly rated collateralized debt obligations (CLOs) and commercial mortgages asset-backed securities (CMBS).

Mitsubishi UFJ reported total credit costs of ¥90.7 billion (US$1.2 billion), down 55%, from ¥201.5 billion (US$2.3 billion) in the year-ago period, largely due to a decline in credit costs from other subsidiaries. Net losses on equity securities were ¥155.0 billion (US$2.0 billion), up from ¥23.8 billion (US$0.3 billion) in the prior-year period, mainly due to higher losses on write-down of equity securities, reflecting weak stock performance in general stock market.

G&A expenses fell ¥38.5 billion (US$0.5 billion), or 2.5% year over year to ¥1,473.3 billion (US$18.7 billion), due to an ongoing intensive corporate-wide cost reduction.

As of December 31, 2011, Mitsubishi UFJ reported total loans of ¥81.0 trillion ($1.05 trillion), up from ¥79.7 trillion (US$1.04 trillion) as of September 30, 2011, primarily due to an increase in overseas loans. Deposits climbed to ¥122.4 trillion (US$1.58 trillion) from ¥121.6 trillion (US$1.59 trillion) as of September 30, 2011, mainly due to an increase in individual deposits.

For the nine months ended December 31, 2011, total net assets were ¥11.2 trillion (US$0.14 trillion), down from ¥11.3 trillion (US$0.15 trillion) as of September 30, 2011. The decline was principally driven by increased negative impact of foreign currency translation adjustments related to the appreciation of the Japanese yen.

Net unrealized gains on securities available for sale dropped to ¥298.5 billion (US$3.86 billion), from ¥390.2 billion (US$5.09 billion) as of September 30, 2011, aided by unrealized losses recognized on domestic equity securities.

Outlook

Mitsubishi UFJ Financial has the target of ¥900 billion (US$11.7 billion) of consolidated net income for the fiscal year ending March 31, 2012.

Our Take

Mitsubishi UFJ expanded its scope of global strategic alliance with Morgan Stanley ( MS - Analyst Report ) into new geographies and businesses, including a loan marketing joint venture that will provide clients in the United States an opportunity to expand the world-class lending and capital markets services of both companies.

Going forward, we expect Mitsubishi UFJ’s strong business model, diversified product mix and lower credit costs to boost its bottom line. However, we are concerned about the increasing competition and volatility in the Japanese economy.

Currently, Mitsubishi UFJretains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. Considering the fundamentals, we are also maintaining a “Neutral” recommendation on the stock.